Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Monday, January 24, 2011

Does Anyone Understand the Meaning of "Competitiveness"?

OK, I start this post by agreeing with Paul Krugman this morning that the term "competitiveness" is hackneyed and essentially meaningless. However, as I read Krugman's column today, I think that Krugman has come to believe that all that is needed to make our economy more "competitive" is for the Fed to print more money and the government to spend it.

That's right; we need to be Number One in spending. That will revitalize the U.S. economy, at least according to Krugman, who sees "jobs" in and of themselves as the sign of a truly "competitive" economy:

It’s true that we’d have more jobs if we exported more and imported less. But the same is true of Europe and Japan, which also have depressed economies. And we can’t all export more while importing less, unless we can find another planet to sell to. Yes, we could demand that China shrink its trade surplus — but if confronting China is what Mr. Obama is proposing, he should say that plainly.

Furthermore, while America is running a trade deficit, this deficit is smaller than it was before the Great Recession began. It would help if we could make it smaller still. But ultimately, we’re in a mess because we had a financial crisis, not because American companies have lost their ability to compete with foreign rivals.

This demands a larger question, which Krugman does not ask: Why did we have a financial crisis in the first place? The secondary question is this: What needs to be done in order to bring the economy into a recovery, given we have had a financial crisis?

For Krugman, the answer is simple because his view of an economy is simple: Increase government spending. He writes:

The favorable interpretation (of President Obama's new "competitiveness" initiative), as I said, is that it’s just packaging for an economic strategy centered on public investment, investment that’s actually about creating jobs now while promoting longer-term growth. The unfavorable interpretation is that Mr. Obama and his advisers really believe that the economy is ailing because they’ve been too tough on business, and that what America needs now is corporate tax cuts and across-the-board deregulation.

My guess is that we’re mainly talking about packaging here. And if the president does propose a serious increase in spending on infrastructure and education, I’ll be pleased.

He further adds:

The financial crisis of 2008 was a teachable moment, an object lesson in what can go wrong if you trust a market economy to regulate itself. Nor should we forget that highly regulated economies, like Germany, did a much better job than we did at sustaining employment after the crisis hit. For whatever reason, however, the teachable moment came and went with nothing learned.

In both cases, Krugman employs the non sequitur as his rhetorical device. In the first quote, he assumes that if the government suddenly starts more public works construction jobs and showers new money on government schools, that the economy will regenerate itself (or at least start on the path to regeneration).

In the second quote, he creates the syllogism:

Germany's economy has more regulation than that of the USA

German employment losses have not been as great as those in this country

Therefore, a more heavily-regulated economy creates more prosperity.

This ignores the particular areas of regulation, as it makes a blanket statement about regulation but fails to deal with any specifics. Furthermore, throughout the column, Krugman has only one standard for prosperity: employment.

It reminds me of a television debate that a Marxist "economist" had with a "free-market" economist about 30 years ago. The second economist had just come back from Romania and he was pointing out how poor the people were and how badly things worked there.

The Marxist replied (as though this statement trumped everything else), "But there is no unemployment there." In other words, having an official "job" as named by the government was the ultimate sign of prosperity and "competitiveness," and while Krugman is not claiming (at least I don't think he is claiming) that Romania under Nicolai Ceaucescu's tyrannical government was superior to whatever we had in this country, nonetheless he uses the employment standard as though nothing else matters.

In fact, he contrasts his ideal government policy with private business, writing:

Consider: A corporate leader who increases profits by slashing his work force is thought to be successful. Well, that’s more or less what has happened in America recently: employment is way down, but profits are hitting new records. Who, exactly, considers this economic success?

Again, we are seeing the non sequitur at work. According to this statement, Krugman seems to believe that workers are pure cost, and that the more layoffs a company has, the greater its profitability will be. Thus, he reasons, a "competitive" private economy will have high unemployment AND high profits, which means that a "competitive" private sector actually is BAD for an economy and for human welfare in general.

Krugman demonstrates the typical macroeconomic view of an economy, seen through aggregates and the false belief that all factors of production are homogeneous and that there is no connection between production and consumption. However, no company becomes more profitable simply by having mass layoffs. Layoffs are a response to changes in consumer choices for the final products made by the firm. Labor is a factor of production, a heterogeneous factor; labor is meaningful as it applies to production, and if its discounted marginal revenue product falls to less than its marginal cost, then a company is wise to jettison that factor, just as it jettisons other factors that become cost burdens.

Furthermore, an economy cannot grow unless entrepreneurs find ways to make more final goods while using fewer resources. At the same time, a growing economy finds ways to take the temporarily unused resources and apply them to other productive uses.

Krugman, however, sees no connection between resources and economic growth. For example, he has written that we can "rebuild" our economy via "green energy," yet none of those industries are able to survive without government mandates, special tax breaks, or outright subsidies.

To an economist, there is a fundamental difficulty with a so-called green economy: it cannot stay afloat without cannibalizing the healthy and profitable areas of production. To Krugman, however, it is all just a matter of spending, and if government borrows and taxes and regulates in order to force Americans to purchase products they don't want, then that is good for the economy.

True, I have used a non sequitur, but that is what Krugman seems to be saying. In his view, the only thing that matters is employment. If government spends and hires people to engage in "jobs," then prosperity will follow, as all that matters are aggregates.

That makes no sense, economically speaking. If Krugman is right, and if the primary issue is simply "creating jobs" so that people can have an income, why do we need production at all? Wouldn't it be even better if the Federal Reserve System just printed zillions of dollars and left bags of money with each person? Since "spending" magically leads to everything else, why wouldn't that be a perfect solution to our problems?

To Krugman, an economy is a mass of numbers and nothing else. There are no relative prices and no interrelationships between factors of production. Thus, to him, "competitiveness" is based on the rate of unemployment, which means that there is nothing in his viewpoint that would have refuted the Marxist I heard 30 years ago claim that Romania's economy -- under which most people in that country lived in poverty -- was superior to that of the United States.

Maybe I remember wrong, but wasn't Krugman condemning Germany's "austerity" for being the cause of Spain and Italy's woes?

Germany was supposedly the country that started the "austerity bandwagon" in the western world after the first signs of the Euro crisis, but I wonder if German government ever actually went through with it.

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, ALAN GREENSPAN NEEDS TO CREATE A HOUSING BUBBLE TO REPLACE THE NASDAQ BUBBLE.

Krugman - October 30, 2006:

Paul Krugman: As Paul McCulley of PIMCO remarked when the tech boom crashed, GREENSPAN NEEDED TO CREATE A HOUSING BUBBLE TO REPLACE THE TECHNOLOGY BUBBLE. So within limits he may have done the right thing. But by late 2004 he should have seen the danger signs and warned against what was happening; such a warning could have taken the place of rising interest rates. He didn’t, and he left a terrible mess for Ben Bernanke.

I’m really sick and tired of tired old incoherent Keynesians who haven’t a clue about the problems of economic calculation (the center piece of Austrian theory) lecturing Austrians about anything.

Anon,Krugman, like LK, uses a heads-I-win-tails-you-lose strategy with Germany. Any success is because of their Keynesianism, the strength of their labor unions, etc. Any failures are the result of their "tight" monetary policy, Agenda 2010, etc. Krugman has been all over the map re. Germany (but always correct of course)!

"ALAN GREENSPAN NEEDS TO CREATE A HOUSING BUBBLE TO REPLACE THE NASDAQ BUBBLE."

Bob, that was a prediction, not him asking for a bubble. Look at what at the context behind the McCulley quote. McCulley certainly was not making an argument for a bubble. He thought Greenspan would see one and let it grow. Kruman agreed.

If you're not convinced, look what Krugman wrote just two weeks later before any silly accusations.

"Back when I first got professionally obsessed with Japan's problems, around four years ago, I made myself a mental checklist of reasons that Japan's decade of stagnation could not happen to the United States. It went like this:

1. The Fed has plenty of room to cut interest rates, which should be enough to deal with any eventuality.

2. The U.S. long-term budget position is very strong, so there's plenty of room for fiscal stimulus in the unlikely event interest rate cuts aren't enough.

3. We don't have to worry about an Asian-style loss of confidence in our business sector, because we have excellent corporate governance.

4. We may have a stock bubble, but we don't have a real estate bubble.

I've now had to strike the first three items off my list, and I'm getting worried about the fourth.

More and more people are using the B-word about the housing market. A recent analysis by Dean Baker, of the Center for Economic Policy Research, makes a particularly compelling case for a housing bubble. House prices have run well ahead of rents, suggesting that people are now buying houses for speculation rather than merely for shelter. And the explanations one hears for those high prices sound more and more like the rationalizations one heard for Nasdaq 5,000."

Is it not true that technology has advanced to such a level (and not just recently) that we have the capability to provide quality living standards for everyone? It seems extremely clear to me that national and international problems of poverty, unemployment, underemployment, etc. are not due to insufficient resources or technological capacity but rather from inadequate dispersion of purchasing power. In other words, it's a monetary problem.

Milton Friedman - no friend of Marxism - wrote in favor of printing money and I link to that article on my blog.

You're critical of Krugman and the idea of public spending and within the confines of orthodox finance and capitalism, public spending has a hard time. But you seem to ignore the horrible inefficiencies of a "private" system which can't seem to generate full employment and prosperity except in periods of bubble expansions, concentrates wealth to extreme degrees, trends toward oligopolies in every industry, and is leaving the vast majority in positions as employees that, as insecurity goes, are not a whole lot different than the landless serfs of feudalism. I think it's funny that Hayek, et al consider collectivism the road to serfdom when capitalism is driving on that road at 100 mph.

Finally, I believe you're not giving credit to Marx when it is in fact due. Marx wouldn't have approved of Romania, the USSR, or any of the 20th century communist experiments. His class analysis of capitalism seems pretty damn accurate given we live in a world where 5% own about 70% of all financial assets.

So we can print our way to prosperity? More fiat paper=more wealth? Ask Gideon Gono over in Zimbabwe how well that worked out.

the horrible inefficiencies of a "private" system which can't seem to generate full employment and prosperity except in periods of bubble expansions, concentrates wealth to extreme degrees, trends toward oligopolies in every industry,

These alleged problems you identify are caused, and exacerbated by government and the central bank. Seems you have a problem with crony capitalism, which is not the same as capitalism.

Right, because Romania didn’t “do socialism right.” If only they did socialism the right way (whatever the hell that way is, quite frankly no one cares) Romania would have prospered if only they had followed Marx just a little bit closer.

So, if the gov't wants "competitiveness" why is it that they're so dead-set against competition in telecomm, electricity, potable water, waste-water treatment, transportation?

Why is it that they turn a blind eye to shutting out US citizen (including naturalized) STEM workers from being seriously considered at hiring time in favor of guest-workers and green card candidates? from posts in grad schools? from internships and post-docs?

"Is it not true that technology has advanced to such a level (and not just recently) that we have the capability to provide quality living standards for everyone?"

No, it is not true. For instance, Mexico does not have "quality living standards", and they're better off than nearly everyone else in the world. But there's room for competition to improve living standards by improving products and services.

The reason unemployment (and durations of unemployment and LFPR) is important is that it is the most pressing (and recalcitrant) problem for the most US citizens over the last 20 years. It has persisted through several recessions and so-called "recoveries". It has clobbered workers in heavy-metal manufacturing and it has clobbered the USA's "best and brightest" who thought they were on the cutting-edge of future economic development.

And the government has persistently gone to great lengths to make it worse.

We can have full employment anytime we want it. As Henry Hazlit pointed out 50 years ago in his book "Economics in One Lesson," all we need do is eliminate trucks and railroads and have people move goods on their backs. How long would our goods producers stay in business? Prof Krugman would have us believe that all that new income the unemployed would now earn from carting goods around on their backs would generate new demand that would keep our (newly uncompetitive) goods producers in business. But, of course, the goods would cost more so less could be purchased. There is no net gain and a true net loss when these goods producers eventually go out of business because they are "uneconomic."

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).